Sunday, September 3, 2017

Weekend reading links

1. The Kenyan Supreme Court's decision by a 4-2 verdict to overturn the just concluded Presidential election results in favour of incumbent President Uhuru Kenyatta is hugely significant. Kenyatta had been declared winner over long-time opponent Raila Odinga, winning 54% of the votes in the elections held in early August. Odinga had contested the results claiming massive fraud in the electoral process. The Court nullified the results and has directed another vote within 60 days.

The decisions comes as a massive surprise given the generally subservient nature of courts across African countries, especially since Kenyatta has been President since 2007. The unprecedented nature of the decision elevates the Supreme Court's institutional credibility. Adding to the good news and signalling a maturity in Kenya's democratic polity, Kenyatta has said he will accept the verdict and abide by the Court's decision.

Interestingly, foreign election observers and western officials had declared the elections mostly free and fair and found no signs of "centralised manipulation". They had also called on Odinga to accept the electoral verdict. This decision of the Supreme Court should raise questions about the credibility of such observers.

2. It is reported that the All India Council for Technical Education (AICTE) wants to close down about 800 engineering colleges across India as there are no takers for their seats. AICTE has closed down more than 410 colleges across India since 2014-15.

In all the wailing about the poor quality of school education, we overlook the equally dismal standards in higher education. Sample this from Devesh Kapur,

Look at the way our vice chancellors are selected. Many of them would not get a job as a lecturer in a decent college. There are reasons to believe that at least in some cases, they have paid their way there. Between 2000 and 2015, we set up almost six new colleges a day, every single day over 15 years including weekends. At its peak, the U.S., with way greater resources, set up one new college a week. And this, when we have the most regulated higher education system… the UGC (University Grants Commission), AICTE (All India Council for Technical Education), etc.

3. I will blog separately about the recently released RBI report on financial savings of Indian households. This graphic shows that capital market savings, insurance and pension products are really tiny proportion of aggregate household savings.

Just as investors talk about a “Korea discount”, to describe chaebols’ lousy profits, so there is an “India premium”... Since 2001 the return on equity (ROE) of listed Indian firms has averaged 19%, eight percentage points above the figure for companies in rich markets and five percentage points above those in emerging ones... The leading private lender, HDFC Bank, has an 18% ROE, ranking tenth among the top 100 global lenders. Hindustan Unilever, a consumer-goods firm, has a 77% ROE, over twice that of its parent, Unilever. Even in basic industries, such as cement, returns have been relatively high.

The article talks about the scale of informality and the potential of reforms like GST to increase the formal sector market,

For big companies, formalisation could boost profits in the short term. They may take business from smaller firms: at least 40% of India’s tea, 85% of its jewellery and 70% of its dairy products are sold in the grey economy.

Couple of observations. One, the biggest impact of GST is most likely to be in contributing to formalising economic activities than increasing tax-to-GDP ratio, which is unlikely to rise by much. Second, the shift to formality will be gradual and take several years if not decades.

5. Livemint has a good article on the data mapping done in the 83 villages of Jiwati taluk of Maharashtra's Chandrapur district. Financed by Tata Trusts and implemented by NGO partners, the initiative has surveyed 160,000 households and collected 6.9 million data points covering demographics, status of access to various utilities and welfare services, human resource needs etc. The information has been collected through an one-time survey exercise. The captured information is apparently rendered in simple dashboards to facilitate officials use it as decision-support.

While this is all good, I have two concerns. The most relevant concern is how the data collected will keep getting updated. The similarity with GIS mapping cannot be missed. For sure, with persistence and effort, it may be possible to ensure that the data on government benefits and services delivered can be captured. But even this is tricky. For example, gas connections can be given and the household may use for three months and then relapse. Similarly electricity connection status can easily revert back after a big rain or thunderstorm. In neither of these cases, the data is likely to get updated. Then there are other data like skill acquisition and so on, where the individuals may be accessing them separately and may not get updated. So, over time, the baseline data available becomes dated and useless as a decision-support.

The other concern is on how actionable this information is. For example, information on people without ration cards or skill training or housing is no guarantee for provision of those. That is a function of budgets, state capacity, and other factors, most of them beyond immediate systemic solutions.

But all these cannot be a reason for not encouraging such data collection since it is the first necessary step in any meaningful planning and decision-making which is based on evidence and other objective considerations.

6. The week saw the French President Emmanuel Macaron unveil his much expected labour reform proposals, which are to be placed before the Parliament later this month. The proposals include,

The measures... will cap the damages that courts can make employers pay in cases of wrongful dismissals, except in discrimination cases. They also reduce the statute of limitations for workers to bring cases from two years to one year and make it easier for companies to close lossmaking French plants. Businesses with fewer than 50 workers — encompassing 95 per cent of French companies — will be able to negotiate specific deals directly with employees and without union representatives on areas such as working hours, pay and overtime. Larger companies will be able to negotiate ad hoc agreements with unions, instead of having to abide by more rigid sector-wide rules. Under certain conditions they will be able to organise employee referendums to overcome any failures to reach agreements. The reforms also cut from four to one the number of statutory bodies representing workers within companies... As part of the reforms, unions have secured a 25 per cent rise in the severance packages that employers have to pay. Large companies will also still need the consent of unions representing half of workers to agree deals on working hours.

The reforms take a leaf out of the German Hartz reforms by making companies the focus for negotiating working conditions, instead of the current nation-wide sectoral working conditions contracts. Predictably businesses have welcomed the proposals while unions have opposed it. This may well be France's Hartz IV moment.

7. The graphic below shows that the very richest have not only recovered their wealth destroyed by the Global Financial Crisis but also have sharply increased their wealth since.

8. Finally, the always incisive John Kay points to the financialization of global economy,

Apple’s market capitalisation today exceeds $800 billion, and Alphabet the holding company for Google, is not far behind. For both these companies, operating assets account for about $30 billion of that value. Modern businesses like these employ very little capital, and such assets as they do use mostly need not be owned by the company that operates from them and typically are not. As a source of capital for business, equity markets no longer register on the radar screen. In Britain and United States, the countries with the largest equity markets, funds withdrawn from these markets through acquisitions for cash and share buybacks have recently routinely exceeded the amounts raised in rights issues and IPOs. At the same time, savings have become institutionalised. Initially such institutionalisation took place mainly through the investment activities of pension funds and insurance companies. Today much of their activity has been outsourced and while pension funds and insurance companies are still important players, the equity investment chain is today dominated by the major asset managers – Blackrock, Vanguard, Fidelity and their competitors. And sovereign wealth funds are an increasingly important fraction of public market equity ownership.

The paradox of modern capital markets is that although there is less and less need for market activity from the point of view of either the end users of finance, or the investors who are the ultimate beneficiaries of finance, the volume of market activity has increased exponentially. And yet policy towards capital allocation places more and more emphasis on markets.

He also has this excellent observation on the nature of people who make up today's financial market intermediaries,

An intermediary who genuinely adds value will generally be one who has some specialist knowledge of one or both of the end-users of finance – either the borrowers and the beneficiaries of equity investment, or the depositors and investors whose savings are necessarily the ultimate source of such finance. A few minutes on a trading floor today demonstrates that the principal knowledge many intermediaries have is that of the behaviour of other intermediaries. When I was a schoolboy in Scotland in the 1960s, joining the Bank of Scotland or the Royal Bank of Scotland was a career for the boys in my class who were not going to get good enough grades to go to leading universities. Even when a few years later I began my teaching career at Oxford, careers in the City of London were mostly for undergraduates who were not academically distinguished but nevertheless socially polished and well-connected. All that has changed, and not altogether for the better, as was evident when the Bank of Scotland and the Royal Bank of Scotland failed in 2008, after three centuries of prudent success, under the stewardship of able individuals with good degrees from the finest universities and business schools.

Larry Summers, former president of Harvard and US Treasury Secretary, once observed that finance had once been the preserve of people whose primary skills were those of good companions at the 19th hole of the golf course, but had become the province of people with the sophisticated mathematical skills required to price complex derivatives. Summers, with skills better adapted to solving differential equations than conviviality at the 19th hole, noted this shift with evident approval. I am not so sure.

In today's world, we wrongly consider smartness as something which encompasses every other desirable attribute - industrious, diligent, sincere, sociable and so on. The worst is of course to confuse smartness with wisdom!